Tips for Buying a Franchise Resale

Tips for buying a franchise resale

By Jason Power

Purchasing an existing franchised business, instead of starting one from the ground up, can be a great way to walk into an existing income stream and avoid the high costs of build-outs and training. But purchasing an existing franchise requires a slightly different analysis than purchasing a new one, and there are specific points that need to be addressed. Here are a few key considerations:

Read the franchise disclosure document (FDD) and franchise agreement.

When you buy a franchise resale, you will be required to sign a franchise agreement. You will be as obligated to your franchise agreement, just as the previous owner was to his. Take the time to read and understand your rights, duties, and obligations as a franchisee, because you will be subject to these terms for the next 10 (or more) years.

Review the asset purchase agreement.

When you and the seller agree on the terms of the sale, the seller’s attorney will draft an asset purchase agreement. This agreement —sometimes simply called a buy-sell agreement—spells out the terms of the sale: when the purchase price is due, the closing date, what assets are included and excluded from the sale, and what liabilities you are assuming, like debts of the seller. Review your asset purchase agreement with an attorney to ensure you are properly protected.

Make sure the franchisor approves of the transfer.

Every franchise agreement gives the franchisor the authority to approve of a transfer and of you as the buyer. If the franchisor does not consent to the transfer—or to you as the new owner—then the entire transaction could be dead in the water.

Have a valuation of the business performed.

When you purchase any business, you should know and understand the actual value of the business. Many times this is different than the asking price and can provide room for negotiations. Value can include a variety of things such as the business goodwill, the current inventory, and equipment, etc. The best way to determine the value of a business is to hire a company that focuses on business valuation services.

Obtain and review financial statements.

Purchasing a business that is not profitable is not a smart move. Request that the seller provide financial statements from the last three years (at least) and review them with your accountant to determine profitability and trends. You should also ask the franchisor to provide you with financial information about the seller’s business to make sure the information matches up.

Determine why the existing owner is selling.

People sell their franchises for many reasons. Maybe an owner is ready to retire, or maybe he’s dealing with personal issues that require him to step away from the business. Determine if the seller is selling for personal reasons or if he is jumping ship on a sinking business. Also, study the industry to make sure that it’s sustainable.

Talk to other franchisees and the franchisor about the seller.

Learn about the seller, his reputation, and the business’s reputation in the system, too. If you are buying into a business with a bad reputation, you may have an uphill battle ahead of you.

Paying the transfer fee.

Most franchisors require a transfer fee to cover their costs in evaluating the transfer and the buyer. Either you or the seller must make sure this fee is paid. This transfer fee can be a flat rate or a percentage of the franchise fee. Before you finalize your purchase agreement, make sure you’ve accounted for the transfer fee.

Analyze the franchisor.

Once you purchase the franchise, you will become a franchisee and subject to rules and responsibilities imposed by the franchisor. Just like if you were buying a new franchise, conduct your own investigation of the franchisor to determine whether she has systems and procedures in place to support the system as a whole. There are franchisors that do not have the infrastructure, systems, procedures, or vendors in place to support the system, which hurts franchisees.

Will the staff stay?

If the business you are purchasing has staff or a management team, determine early on if they will stay with the business or if they plan to leave with the seller. Also, if the franchise was run by the seller with little or no staff, as is often the case with a small home-based business, request that the seller agree to be a consultant for a set period of time to introduce you to customers, referral sources, and vendors.

Have a franchise attorney review the agreements.

Purchasing a franchise, even an existing one, involves various areas of law that many attorneys who are not familiar with franchise law may miss or deem absurd. Have a franchise attorney review all the franchise agreements and purchase agreements before you sign.

Jason Power exclusively practices franchise law as a partner at Barber Power Law Group in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the country. Power also represents emerging and established franchisors. Contact Power at jpower@barberpowerlaw.com or by calling 980-202-5679. Visit www.barberpowerlaw.com.

Tips for buying a franchise resale

By Jason Power

Purchasing an existing franchised business, instead of starting one from the ground up, can be a great way to walk into an existing income stream and avoid the high costs of build-outs and training. But purchasing an existing franchise requires a slightly different analysis than purchasing a new one, and there are specific points that need to be addressed. Here are a few key considerations:

Read the franchise disclosure document (FDD) and franchise agreement.

When you buy a franchise resale, you will be required to sign a franchise agreement. You will be as obligated to your franchise agreement, just as the previous owner was to his. Take the time to read and understand your rights, duties, and obligations as a franchisee, because you will be subject to these terms for the next 10 (or more) years.

Review the asset purchase agreement.

When you and the seller agree on the terms of the sale, the seller’s attorney will draft an asset purchase agreement. This agreement —sometimes simply called a buy-sell agreement—spells out the terms of the sale: when the purchase price is due, the closing date, what assets are included and excluded from the sale, and what liabilities you are assuming, like debts of the seller. Review your asset purchase agreement with an attorney to ensure you are properly protected.

Make sure the franchisor approves of the transfer.

Every franchise agreement gives the franchisor the authority to approve of a transfer and of you as the buyer. If the franchisor does not consent to the transfer—or to you as the new owner—then the entire transaction could be dead in the water.

Have a valuation of the business performed.

When you purchase any business, you should know and understand the actual value of the business. Many times this is different than the asking price and can provide room for negotiations. Value can include a variety of things such as the business goodwill, the current inventory, and equipment, etc. The best way to determine the value of a business is to hire a company that focuses on business valuation services.

Obtain and review financial statements.

Purchasing a business that is not profitable is not a smart move. Request that the seller provide financial statements from the last three years (at least) and review them with your accountant to determine profitability and trends. You should also ask the franchisor to provide you with financial information about the seller’s business to make sure the information matches up.

Determine why the existing owner is selling.

People sell their franchises for many reasons. Maybe an owner is ready to retire, or maybe he’s dealing with personal issues that require him to step away from the business. Determine if the seller is selling for personal reasons or if he is jumping ship on a sinking business. Also, study the industry to make sure that it’s sustainable.

Talk to other franchisees and the franchisor about the seller.

Learn about the seller, his reputation, and the business’s reputation in the system, too. If you are buying into a business with a bad reputation, you may have an uphill battle ahead of you.

Paying the transfer fee.

Most franchisors require a transfer fee to cover their costs in evaluating the transfer and the buyer. Either you or the seller must make sure this fee is paid. This transfer fee can be a flat rate or a percentage of the franchise fee. Before you finalize your purchase agreement, make sure you’ve accounted for the transfer fee.

Analyze the franchisor.

Once you purchase the franchise, you will become a franchisee and subject to rules and responsibilities imposed by the franchisor. Just like if you were buying a new franchise, conduct your own investigation of the franchisor to determine whether she has systems and procedures in place to support the system as a whole. There are franchisors that do not have the infrastructure, systems, procedures, or vendors in place to support the system, which hurts franchisees.

Will the staff stay?

If the business you are purchasing has staff or a management team, determine early on if they will stay with the business or if they plan to leave with the seller. Also, if the franchise was run by the seller with little or no staff, as is often the case with a small home-based business, request that the seller agree to be a consultant for a set period of time to introduce you to customers, referral sources, and vendors.

Have a franchise attorney review the agreements.

Purchasing a franchise, even an existing one, involves various areas of law that many attorneys who are not familiar with franchise law may miss or deem absurd. Have a franchise attorney review all the franchise agreements and purchase agreements before you sign.

Jason Power exclusively practices franchise law as a partner at Barber Power Law Group in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the country. Power also represents emerging and established franchisors. Contact Power at jpower@barberpowerlaw.com or by calling 980-202-5679. Visit www.barberpowerlaw.com.